We study the dynamic implications of capital investment in innovative capacity (IC) on future stock returns, investment, and profitability by modeling the unique effects of IC investment on uncertain option generation/exercise and post-exercise revenue. The model highlights the diverse effects...

We study the dynamic implications of capital investment in innovative capacity (IC) on future stock returns, investment, and profitability by modeling the unique effects of IC investment on uncertain option generation/exercise and post-exercise revenue. The model highlights the diverse effects...

Through the interaction between financial constraints and R&D, I study two asset pricing puzzles: mixed evidence on the financial constraints-return relation and the positive R&D-return relation. Unlike capital investment, R&D is more inflexible. A financially constrained R&D-intensive rm is...